Why Older Americans Are Buying Homes ‘All Cash’ In Record Numbers

A new study reveals that retirees are downsizing to smaller homes they increasingly purchase with all cash.

Retirees and other older Americans fueled the sales of all-cash home purchases during the first quarter of 2014, prompting analysts to suggest that baby boomers are downsizing and buying homes in greater numbers. The National Association of Realtors and analysts from RealtyTrac, a California-based firm that tracks the US housing market, came to that surprising conclusion after they couldn’t explain why all-cash sales rose despite declines in distressed sales and investor activity.

NAR reports that all-cash purchases reached 33 percent in the first quarter, up from 31 percent in 2013 and 29 percent in 2012. RealtyTrac’s numbers are more dramatic. All-cash deals hit a record 43 percent of home sales during the first three months of 2014, up from 19 percent a year earlier and the highest level reported since RealtyTrac began chronicling the deals in early 2011.

Cash buyers paid an average of $207,668 for homes during the first quarter, a 13 percent discount to the properties’ average estimated value, according to RealtyTrac.

“Our data doesn’t break it down to show us who it is, but when we talk to brokers and local agents, the feedback we get is that the all cash buyers are retirees,” says Daren Blomquist, vice president at RealtyTrac. “And that makes sense because the state with the highest percentage of all-cash sales is Florida and the top five markets in terms of cash sales in metro areas are in Florida. That’s certainly a spot where retirees are going and often they’re able to buy using their retirement accounts to have that cash available to buy the property. In this market, that gives you a competitive edge to buy with cash to get to the front of the line.”

NAR came to its conclusion after data showed that all-cash home purchases weren’t driven by investors going after distressed properties. Foreign buyers and high-income buyers who benefited from stock market gains are purchasing second homes, but that alone didn’t answer the question about the reasons behind the increase, says NAR spokesman Walter Molony.

“It’s the increased trade down in retirement buyers,” Molony says. “This is a reflection of the aging of the baby boom generation. Older buyers have tended to stay in their homes longer and have built up a lot of equity due to debt reduction and price appreciation. As long as they didn’t treat their home as a piggybank, most of them are in a position to pay cash for that retirement home or certainly make a very large down payment.”

The market share of the people who were trading down, when you look at it over time, has been pretty stable or within a percentage point or two, Molony says. But it rose dramatically over the last two years, going from 23 percent in 2011 to 25 percent in 2012 and 29 percent last year. That increase in trade down activity and retirement buyers and the aging of the boomers accounts for much of growth in the all-cash sphere, Molony says.

“We see this clearly in looking at 65 to 74 year olds who on the average are purchasing a home that’s 300 square feet smaller, but in term of cost that home costs $38,500 less than the home than they just sold,” Molony says. “They have a lot of equity accumulation, and they’re purchasing a smaller property and that’s why so many of them are in position to pay cash.”

As for how NAR came to that conclusion, Molony says it’s simply “connecting the dots” to determine why all-cash sales were rising when distressed sales were down. In most surveys, data showed the trade down activity historically at 21, 22 and 23 percent. It moved up a couple of points to 25 percent in 2012.

“That’s a curiosity and in 2013, when it jumps up to 29 percent, that’s telling us it’s a trend,” Molony says. “That’s something we need to keep monitoring, but this in all probability is just a simple demographic reflection of the aging of the baby boom generation.”

It’s a major factor of demographics that was facilitated by a two-year recovery in the housing market where the nation had a lot of growth of equity in the last couple of years, Molony says. It may even been playing catch up because of the slowdown and that prompted a higher spurt, he says.

“I think we’ll see the cash sales decrease in the second half of the year because this is a limited and finite trend,” Blomquist says. “There’s a finite pool of cash buyers out there. I think what we’re saying is this is a phase of a housing recovery that’s not going to be a long-term paradigm shift where all of a sudden the US housing market is going to be cash based.”

Among metropolitan statistical areas with a population of at least 500,000, those with the top five highest percentages of cash sales were all in Florida: Cape Coral-Fort Myers, (73.6 percent), Miami (67.1 percent), Sarasota, (65.1 percent), Palm Bay, (64.1 percent) and Lakeland, (61.8 percent), RealtyTrac reported. Other major metro areas with more than 50 percent all-cash sales included New York City (57.0 percent), Columbia, SC, (56.1 percent), Memphis (54.9 percent), Detroit (53.5 percent), Atlanta (53.2 percent) and Las Vegas (52.2 percent).

Blomquist says they hear anecdotes of people jumping into retirement a little earlier than they planned because they see the opportunity to sell high and buy low. If you owned a home for 20 years, you built up a lot of equity and because there’s such low inventory, you can sell that at a premium price and take the cash from that and buy a smaller property in another part of the country or state that’s less expensive, he says.

“I think this a highly competitive market with low inventory and in a lot of markets you have relatively low priced properties available and they see the market as bargains and they see the market as recovering and that all leads to people being willing to put down their own money and pay cash,” Blomquist says. “They’re confident enough in the real estate market that they think they can get a good enough bargain that they are willing to put their money where their mouth is and pay cash for those properties.”

In its first quarter numbers, RealtyTrac says nearly 57 percent of the sales for properties between 500 and 1,000 square foot were with cash. That’s up from 26 percent in the first quarter of 2013.